North American capital spending is expected to be down slightly in 2008, with US expenditures likely to decrease marginally
January 2008
By Drew Miller, Senior News Editor, Pulp & Paper Week, RISI
North American pulp and paper industry capital spending increased in 2007 compared with 2006 yet appears likely to be flat-to-declining slightly in 2008 as companies focus on selected projects to improve profitability and product mix and curb spiraling energy costs. But, fluctuating exchange rates plus variable input costs such as oil and electricity could raise the spending levels back to 2007 levels.
A survey of US paper companies during fourth quarter 2007 suggested that they will reduce spending by between 5-7% on new plant and equipment during this year, following a year filled with several high-profile machine conversions, modifications and mill startups. But projects started in 2007 can easily spill into 2008, according to industry observers. This modest decrease follows a year in which capital spending did increase but was ultimately set back due to high energy costs and stringent cost controls.
Actual spending for last year will probably show a small reduction as companies quickly encountered mixed market conditions in a number of sectors and rapidly rising energy costs, which squeezed profit margins. Actual spending results for 2007 will not be available until companies release their annual reports in February/March, but some have provided guidance on their outlays for 2007 and tentative plans for 2008.
International Paper (IP) estimated spending at $1.25 billion last year, and through the third quarter had spent about $800 million. However, Weyerhaeuser had targeted spending at about $725 million at the beginning of the year but had only spent $462 million through the third quarter of 2007, which nets to about $615 million on an annualized basis. If these examples are typical, US paper company spending may actually decrease more than the amount originally expected for 2007.
But paper and paperboard markets may be somewhat weaker in 2008 due to slower North American economic growth. Producers have announced price increases on a number of grades, such as uncoated freesheet and solid bleached carton board, going into 2008, which may cause customers to rebuild inventories.
Priority on reducing energy costs
Improved profitability would probably result in higher capital spending again in 2008, but the major emphasis on spending continues to be on reducing costs (particularly for energy) and improving product mix. The North American grade sectors receiving the most capital spending attention are tissue (with by far the most new machines), new pulp and deinking lines, and mill conversions to grades like containerboard and pulp.
The doubling in gas costs between 2005 and 2007 made returns on energy reduction projects increasingly attractive. With a barrel of crude oil at about US$95/barrel, companies are targeting projects to improve energy efficiency.
Weyerhaeuser plans to spend an estimated $1 billion on new recovery boilers over the decade ending in 2010. The company, for example, is spending roughly C$160 million on a boiler (and other environmental upgrades) for its Grande Prairie, AB, market pulp mill following a similar boiler replacement project at its Valliant, OK, containerboard mill, and plans to spend about $185 million for a new boiler, turbine generator, waste treatment, and steam piping system at its linerboard mill in Campti, LA.
Tissue leads project activity
Tissue has been receiving the most capital spending because of its steady demand growth and healthy profit margins. Three of tissue’s biggest players are ramping up capacity. Procter & Gamble (P&G) completed a new tissue machine at its Green Bay, WI, mill in 2007; Kimberly-Clark (K-C) started up a new 65,000-ton/yr machine at its Beech Island, SC, mill; and Georgia-Pacific (G-P) has put the finishing touches on its machine conversion at its Clatskanie, OR, (Wauna) mill. In 2008, SCA Tissue will start up its new 70,000-ton/yr second machine for its new Cherokee, AL, mill.
G-P’s Wauna project is a through-air dried (TAD) tissue paper machine, supplied by Metso, and was scheduled to start by the end of 2007. The company is planning another new TAD machine in the Southeast for possible startup in next two years. This follows startup of TAD-equipped machines at the Wauna mill in early 2004 and the Port Hudson mill in Louisiana in 2003.
A newcomer to the tissue circuit – Royal Paper Converting – plans to build a new 25,000-ton/yr tissue mill near Phoenix, AZ.
In late 2007, P&G also announced that it wants to build its second new tissue paper machine in three years in a $300 million project in northern Utah. The PM would start in early 2010.
Other tissue-oriented projects due in 2008 include recovery boiler work at K-C’s New Milford, CT, mill while P&G plans to upgrade some of its converting and finishing equipment at its Albany, GA, tissue mill.
New deinked pulp lines and recycling
New projects are also aimed at replacing and upgrading existing pulp or deinking lines. During 2008, work is expected to commence at SFK Pulp Fund’s Fairmont, WV, mill on a new deinking line, building upon improvements made at SCA Tissue North America’s Alsip, IL, mill and at K-C’s Mobile, AL, pulp and tissue complex in 2007.
In terms of recycling, Pratt Industries USA chairman and CEO Anthony Pratt promised to invest $1 billion over 10 years in recycling initiatives at US-based Pratt Industries to combat global warming. The $1 billion investment will be used to finance at least three new recycled paper mills, four waste-to-energy plants, 30 material recovery facilities (MRFs), and converting plants to integrate the paper mills.
Pratt said that the investment will save hundreds of thousands of tons of carbon dioxide from going into the air during the first half of the 10 year period and more than one million tons/yr by the end of the decade.
Pratt Industries also plans to build the first US containerboard machine in seven years with startup in 2009. The $150-million project, the company’s third greenfield American mill built since the mid-1990s, is scheduled for startup in early 2009 and is expected reach its full production of 360,000 tons/yr by summer.
The new 220-in. trim Overmeccanica fourdrinier PM would make lightweight linerboard and corrugating medium in the 21- to 35-lb basis weight range (and could eventually go as low as 18-19 lb).
Grade switching to better mix
In uncoated freesheet (UFS), IP hopes to reduce costs by $35/ton or $125 million/yr through its mill optimization program, which is part of its overall transformation plan announced in July 2005. One of the major cornerstone projects to help reach that goal was to convert the “high cost” 350,000-ton/yr Pensacola, FL, (Cantonment) UFS mill machine to 500,000 tons/yr of “low cost” lightweight linerboard in the second half of 2007. IP began producing high-performance lightweight linerboard during fourth quarter 2007.
The new PM will produce linerboard in a basis weight range of 30 lb (180 gsm) to below 18 lb (90 gsm) - which at the lower end would be below virtually all linerboard produced in North America, but common for new recycled containerboard macines in Europe and Asia.
IP hopes the conversion will shift its cost structure from “third quartile” in uncoated freesheet to “first quartile” with lightweight linerboard.
During 2008, IP will also invest about $10 million to convert its Bastrop, LA, UFS mill to 100% market southern bleached softwood kraft (SBSK) and fluff pulp production, raising the amount of pulp it sells to the open market and ceasing production of UFS paper.
IP was to begin work on the conversion in 2007, with equipment upgrades slated for completion by the fall of 2008 that will bring the mill's market pulp capacity to 408,000 tonnes/yr.
In 2008, Otsego Paper, a wholly owned subsidiary of U.S. Gypsum, hopes to better optimize its product mix by converting its No. 1 corrugating medium machine to gypsum wallboard facing paper production. Metso will handle the conversion, which is scheduled to include a new three-ply forming section with a ValFormer unit, modifications of the drying section, and a modernization of the reel. Metso Automation will supply consistency analyzers for the machine’s wet end.
With thermal paper sales rising 19% in 2006, Appleton plans a $100 million project to add a new coater for increasing thermal paper production in 2008 on PM 92 as well as increasing the machine's capacity at the West Carrollton, Ohio, mill.
The "state-of-the-art" coater will increase the PM's paper quality and improve the machine's performance, according to the company. The new coater and higher capacity PM 92 should come online in second quarter 2008, though Appleton did not identify the capacity increase.
Lowering energy costs
Over the past few years, with the strengthening of the Canadian dollar and high energy and fiber costs, Canadian firms’ spending has been at a minimum. One of the few major capital spending projects in Canada to receive the go-ahead is in Grand Prairie, AB, where Weyerhaeuser plans to spend about C$160 million to replace its recovery boiler, plus other additional environmental upgrades.
The project is expected to reduce the mill’s need for natural gas and decrease the amount of greenhouse gases the plant generates. The project is expected to increase the northern bleached softwood kraft pulp mill’s capacity by potentially 30,000 tonnes/yr to 380,000 tonnes/yr.
In 2008, Domtar plans to restart its 155,000-ton/yr PM 1 at its Dryden, ON, UFS mill while shutting down the larger 330,000-ton/yr PM 2, thereby reducing UFS capacity to match slumping demand.
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